UID may be required for all securities transactions

Mumbai: The ministry of finance has sought the views of capital market regulator Securities and Exchange Board of India (Sebi) on making the unique identification (UID) number mandatory for all securities transactions, a move that, if implemented, could help the former track incidents of frauds and money laundering in market transactions.

“We have been asked for recommendations. I think using UID will be good for enhancing transparency in the securities market,” said a senior Sebi official, who did not want to be identified because the regulator has not formally sent its recommendations yet on the proposal.

Sebi’s support is also a enhance for UID, not just because the regulator calls the shots in India’s booming financial markets, but also because the regulator’s move to make UID mandatory for transactions will enhance the number’s acceptance and use.

Nandan Nilekani, chairman of the Unique Identification Authority of India (UIDAI) that’s overseeing the Union government’s project to assign a 12-digit unique identity number to every resident of India, declined to comment. “I have nothing to say on this,” he said.

The ministry’s proposal is in line with the recommendations of the inter-governmental Financial Action Task Force (FATF) that seeks to prevent money laundering and the financing of terrorism globally. Mint has reviewed the ministry’s note.

According to an official familiar with the development, Sebi and UIDAI officials will hold a meeting this month to discuss the capital market regulator’s recommendations. The official declined to be identified.

The unique identification project was initially conceived by the Planning Commission as an initiative to enable the efficient delivery of welfare services to their intended beneficiaries and also aid in effectively monitoring various development programmes run by the government.

Deals in the financial market are often complex and routed through multiple entities across countries. In the absence of a common identification tool amid surging transaction volumes, detection of money laundering and fraud in financial services has become increasingly difficult.

At present, the permanent account number (PAN), allotted by the income-tax department, is the main identification tool in the securities market.

Large-scale fraudulent deals mostly involve entities that are financially sound and often enjoy political patronage. These entities include promoters and stakeholders of large-cap companies who do hold PAN and, hence, such deals are often consummated using accounts held in fictitious names, or benami accounts.

“UID will help in tracking benami account holders and the transaction done through such accounts,” said an income-tax official, who did not want to be named as he is not authorized to interact with the media.

“For instance, even if an individual does not provide a PAN, a bank account or any transaction account can be created today just by submitting Form 16 of income tax.

Besides, many have multiple PAN cards, which can be misused.

If UID is assigned to every individual and if it is mandatory to quote for every transaction, the account can be easily traced to the owner,” the tax official added.

Employers deduct tax at source and provide their employees with Form 16, which shows the tax deductions and net paid income.

FATF’s mandate is to develop and promote policies, both at national and international levels, to combat money laundering and terrorist financing.

Since its creation, FATF has spearheaded the effort to adopt and implement measures designed to counter the use of the financial system by criminals.

It established a series of recommendations in 1990, revised these in 1996 and in 2003 to ensure that they remain up-to-date and relevant to the evolving threat of money laundering.

The body has prescribed 40 general recommendations and nine special recommendations to define criminal justice and regulatory measures that should be implemented to counter this problem.

India’s federal investigating agency, the Central Bureau of Investigation, recently exposed a bribes-for-loans scam that led to the arrest of five top officials from state-owned banks and other financial institutions. UID can help investigating agencies establish the trail of money, which is key in such cases, experts say.

To implement FATF’s proposals, all nations are required to set up a financial intelligence unit (FIU), where all suspicious transactions will be promptly reported for action. India became the 34th member of FATF in June.

“UID will simplify life for both consumers and providers of financial services,” said Santanu Syam, executive director (operations) at Angel Broking Ltd.

It will also help the investigative agencies to monitor suspicious transactions, he added.

“Today, FIU collects information from various sources like banks, mutual funds, brokers and insurance companies separately. It then tries to put them together to examine if there is any linkage,” Syam said, adding, “when UID is made mandatory for all financial services, the linkage becomes visible more easily for FIU.”

In 2007, Sebi had made it mandatory to furnish PAN for all stock market transactions, but investors are required to furnish PAN only when they invest at least Rs50,000 or more through mutual funds.

Mutual fund investors will need to mandatorily furnish their PAN from next year irrespective of the size of their investment, in tune with revision in the know-your-customer norms.

One of the biggest challenges in the financial transaction space is identifying the customer and the beneficial owner (the actual beneficiary) where multiple transactions through pooled accounts are involved.

If the FATF recommendations are implemented, every financial institution will be required to ensure that they are aware of the beneficial owners of such transactions.